Ohio legislature mulls anti-ESG bill

Ohio state legislators are considering a bill that would bar the state's pension systems, state colleges and universities and the Bureau of Workers' Compensation from prioritizing environment, social and governance factors when making investment decisions. 

Ohio's Senate Bill 6 passed the state Senate on May 10 by a vote of 26 to 7, with senators voting along party lines. It was introduced in the House on May 16, referred to the financial institutions committee on May 23 and currently remains in committee.

Republicans control the state House, the state Senate and the governorship in Ohio.

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The bill's sponsor, Republican state Sen. Kirk Schuring, did not respond to requests for comment.

Senate Democratic Leader Nickie Antonio said the bill was "a solution looking for a problem" and the entities it targeted already serve as fiduciaries with a legal responsibility to maximize returns for their beneficiaries.

"That this should be a partisan issue just shows that there's disagreement on the value and the return in these types of investments," she said. "They're saying there are negative consequences for including ESG investment policies, when actually, by limiting them … you could actually harm the long-term return on those investments.

"It's an out-of-touch policy," she added. "You can't say let the free market decide, and then pass legislation that would actually limit opportunities to grow our funds."

Antonio pointed to a 2021 survey of 1,261 registered voters by ROKK Solutions and Penn State University's Center for the Business of Sustainability. It found that 63% of respondents believed the government should not set limits on corporate ESG investments, with 70% of Republicans opposing governmental limits and 57% of Democrats against them.

Senate Bill 6 states, in part: "The board shall not make an investment decision with the primary purpose of influencing any social or environmental policy or attempting to influence the governance of any corporation."

There is a loophole of sorts where university endowments are concerned. The bill allows bequests to endowment portfolios to require that the donation be used to affect ESG considerations.

"A board of trustees shall not deny a bequest made by a decedent to an endowment in its endowment portfolio… because the bequest specifically requests the donation be used with the primary purpose of influencing any social or environmental policy, including by attempting to influence the governance of any corporation," the version passed by the Senate reads. "If the board of trustees accepts such a bequest, the board of trustees shall comply with any conditions of the bequest regarding that purpose."

Fitch Ratings assigns Ohio a triple-A long-term issuer default rating and general obligation rating, pointing to consistently balanced budgets, growing fiscal reserves and a low long-term liability burden.

Moody's Ratings in December upgraded Ohio's issuer rating to Aaa and revised the outlook to stable.

S&P Global Ratings in December raised Ohio's general obligation bond rating to AAA from AA-plus and raised its long-term rating on the state's tax credit bonds to AA from AA-minus.

In its rating report, S&P noted Ohio's "significant pension-reform changes that have contributed to improved funding progress and significant benefit flexibility to adjust other postemployment benefits. 

"We consider Ohio in a good position to manage its pension liabilities," the rating agency noted. "Over the past several years, the state committed to paying contributions equal to or above its actuarially determined contribution across all its plans."

Senate Bill 6 is the latest salvo in a battle over ESG investing that has seen some states pass legislation targeting banks and other financial firms as well as local governments in an attempt to curtail ESG investing or boycotts of the fossil fuels industry. 

Despite a recent study finding that a Texas law targeting underwriters has driven down competition in the municipal bond market for Texas debt, leading to higher interest costs for local governments, and despite a lawsuit by the Securities Industry and Financial Markets Association against the state of Missouri over its two new anti-ESG securities rules, Republicans continue to favor bans on ESG considerations.

A 2020 study by Morningstar, a financial services and data firm, found that sustainable funds outperformed non-ESG funds over one, three, five and 10 years, the Financial Times reported. 

Morningstar looked at seven asset classes, and U.S. large-cap blend equity funds pursuing ESG investing performed the strongest. Over 80% of those funds beat traditional funds over the previous decade, while three in 10 euro corporate bond funds managed to do the same. 

Hortense Bioy, director of passive strategies and sustainability research at Morningstar, told the FT that the findings prove there is no "performance penalty" from ESG investing. 

A report from Morgan Stanley released last August found mixed results for ESG funds, with sustainable funds underperforming in 2022 only to recover and outperform non-ESG funds in the first half of 2023, with a median return of 6.9% to traditional funds' 3.8%.

There is some evidence to suggest that over the long term, ESG funds will grow in size and importance; Morgan Stanley said investor demand for the funds is rising, and they drew cumulative inflows of $57 billion in the first half of 2023. Most of those flows were in Europe, however, and a market that favors value and short-term assets could lead ESG funds to underperform again.

Still, as long as growth stocks prioritizing long-term considerations are ascendant, sustainable funds will benefit, Morgan Stanley said, "given their more growth-oriented, longer-term positioning."